Sebi proposes to firm up price bands for derivatives to contain volatility

Sebi

The Securities and Exchange Board of India (Sebi) has put forth a proposal aimed at enhancing the price band formulation for scrips in the derivatives segment. The move seeks to deepen volatility management and reduce information asymmetry in the market. Price bands define the limits within which buy and sell orders are accepted by the trading system of the stock exchange for the day.

Under the proposal, the dynamic price bands for scrips with derivative contracts would be adjusted based on trading activity during the day. Sebi suggests that if a share in the futures and options segment experiences a daily price movement of over 20 percent, the cooling-off period should be increased gradually, with a maximum cooling-off period of one hour compared to the current 15 minutes.

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Once the cooling-off period is over, the scrip would be allowed to move only an additional 2 percent, as opposed to the existing limit of 5 percent. Sebi states that these measures would serve as a tool to control excessive market volatility and help limit extreme single-day price fluctuations in scrips.

The proposal follows a significant sell-off in Adani Group shares earlier this year, prompted by governance concerns raised by the US-based investment firm Hindenburg in its report. Adani Group, which denied any wrongdoing, witnessed a loss of over USD 140 billion in market value.

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Sebi has invited public comments on the proposal until June 5. According to the draft papers, the regulator suggests introducing revised temporary ceilings in the price bands of options contracts, based on the Last Traded Price (LTP) of the options, once the scrip price touches the price band. The aim is to establish daily hard limits for scrips in futures contracts and corresponding price limits in options contracts, taking into account exchange surveillance findings.

The proposal suggests implementing a starting price band of 10 percent for scrips and futures contracts at the beginning of the day. However, these price bands would remain as fixed limits throughout the day for a specific period determined by the exchange, without the ability to be adjusted intraday.

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Sebi also recommends increasing the existing prerequisites for a minimum number of trades, requiring a certain number of trades from multiple unique client codes (UCCs) on both sides. However, Sebi cautions against setting the value too high, as it could hinder the price discovery process.

Additionally, it proposes imposing additional conditions, such as a minimum number of trading members on both sides of the trades at or above 9.9, ideally ranging from 3 to 5 trading members.